Why Are So Many People Poor Today?

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The U.S. Social Security Administration redefined WEP and bituach leumi, so that people in Israel may receive more Social Security. Doug explains the changes in WEP, and warns about being complacent.

Social Security is one of the tools in the fight against poverty, but why are there so many poor people? 2015 Nobel Prize Winner in Economics, Professor Angus Deaton, author of The Great Escape: Health, Wealth, and the Origins of Inequality, provides some interesting answers. Professor Deaton describes his research about poverty, helping the poor, and the reason that the current systems are destined to fail. He also answers the question: Is it smart to help the poor by just giving them cash?

What happened one morning very recently, when your phone rang, and what did that conversation look like?

Angus Deaton: It’s very early in the morning, and you don’t get a lot of phone calls anymore. They’re usually robocalls, but you don’t get a lot of robocalls at 6:10 in the morning, so I had a pretty good idea what it might be. There was this very sweet Swedish voice saying, “We have a very important phone call for Professor Angus Deaton, from Stockholm.” So I knew we were about to step to the merry-go-round, which in fact was the case, but it was very nice. They read a version - that’s a citation, you know, not the 35-page document, but a very short version, and I realized. I’d always thought that I would probably not get it because I tend to work on a lot of different things. My wife, Anne Case, likes to say, “You’re fickle,” and they like to give the prize for some big single thing. But they’d found a single theme through what I did, and I thought, “Oh that’s what my life is about,” so that was actually very nice, and it’s been very nice since.

Douglas Goldstein: How did you know that it wasn’t a prank call? I understand that’s something that happens around the Nobel season.

Angus Deaton: I never thought it was a prank call until my friend Pearson, who’s on the committee, said to me, “Angus, this is not a prank.” I thought, “Oh my God, perhaps it is a prank,” but of course it’s just Pearson playing with my head. So I never seriously thought it was a prank.

How Can We Help the Poor in the United States?

Douglas Goldstein: Now your prize was specifically related to the analysis of consumption and poverty and welfare. I know that a lot of times people talk about abject poverty, but I’d like to talk about one step above that, meaning, let’s exclude from our discussion the people who literally have to spend all day getting water. I’d like to look at the concept of helping people in a society like the United States, who are poor, in order to bring them up to the next level. I think there’s usually a pretty big debate, which is, do you throw money at the problem, or do you try to help people to help themselves? The problem often seems that the cycle continues because whatever programs the government comes up with don’t really seem to help people to break out and to move up a level. Is there a real solution that we should be looking at?

Angus Deaton: I think, for one thing, in the United States, if we are focusing on that, the safety net is way less well-developed, and that is the case in most rich countries in the world. So I find it somewhat impossible to take the idea that we are doing too little. It’s true that Americans have this enormous mistrust of government, which sometimes is less helpful. It’s also true that we have bad data, as far as poverty measures in the United States are concerned. So we are using a measure that was set up in 1963, and for a bunch of more or less accidental conditions or reasons, it’s never been properly revised. So a statement is often made on the right, as we spent a little less amount of money on the war on poverty, and the numbers are exactly the same as they used to be, but it’s really not true.

Douglas Goldstein: Help me out with that, because you were saying the definition we’re using for poverty is from the 1960s. What is a reasonable definition to say that people are really poor?

Angus Deaton: I’m less concerned with that, which is a very hard question, than just if you have programs to help the poor, you should actually count them in deciding whether someone is poor or not, and we don’t even do that. We give people income tax credits so they get money back on their taxes, but we don’t count that in the poverty measures, so you could eliminate poverty by giving people money. I’m not saying you could, but if you were to do that, it’s still wouldn’t show up in the statistic. So it’s just a very elementary thing that we are doing wrong. When this was set in 1960, the poor didn’t pay income taxes, so they just forgot about taxes and they never put it in there. That should have been fixed along the way, and for a whole bunch of reasons it’s been very difficult to do that.

Douglas Goldstein: Can you explain this to me a little bit further? I’m trying to understand. When you are saying that we are not including the fact that the poor are not or were not paying taxes, and therefore they’re not really properly being counted, what would be the way we would count them?

Angus Deaton: What we do is give people money through the earned income tax credit or food stamps, which is now called SNAP. So when you count whether they’re poor or not, you should include that in the amount they have. We are not even doing that, though everybody agrees that that would be a good thing to do. I don’t think anyone, right or left, argues that you shouldn’t count the incomes that people have when you count whether they’re poor or not. I mean this is just like an error. This is not a political dispute, but that doesn’t stop people on the right from using the unadjusted figures to say that poverty has been a failure.

It’s not just that they’re available. The White House would actually have to issue a set of rules which says you have to count this differently. That would have to go to Congress, and then all hell would break loose, and no president is prepared to do that.

Is Giving Poor People Cash the Best Solution to Poverty?

Douglas Goldstein: One of the proposals that a lot of people have suggested for helping the poor, and especially those who are against too many government programs, is to give the poor cash and then they can figure out what they should do with it. This is because they’re grownups, and they don’t have to be told where to spend their money. Hopefully they’ll then have the opportunity to pull themselves up by the bootstraps. Is that a reasonable model?

Angus Deaton: I think it’s reasonable, but a lot is disputed about whether it’s correct. In the U.S., that’s essentially what we do. Food stamps are food stamps. They are not exactly cash, but they are pretty close to being cash. People earn the income tax credit, for instance, as cash, so it’s actually giving them cash. So the debate by giving people cash has been much more in poorer countries, and whether instead of giving foreign aid foremost to the health services or building roads, or giving money to the government to build schools, we should be just giving people cash. That’s a very lively argument. A lot of people think there’s a lot of evidence in favor of that. I’m much more skeptical than most people, but nevertheless that is a lively debate.

Douglas Goldstein: With all of the technology, medicine, and industry that we’ve seen, there’s been so much improvement in the world, and yet there continues to be so much poverty. How come we’re not able to solve the problem?

Angus Deaton: There are a couple of reasons. I think politics is at the center of a lot of this, and most of the poor countries in the world don’t have the capability to deliver the sort of services or to take advantage of that technology, so the lack of government capacity is tremendously important in a lot of those cases. So, for instance, the question I asked myself, and other people ask themselves all the time, is there are millions of children dying around the world every year from things that they would not have died if they’d been born in Israel or they’ve been born in United States. The question is why, and it’s not because they are dying from exotic diseases like Ebola or Marburg Virus or something. They’re dying from measles, or from respiratory infections, or influenza, or they are dying from things that people in rich countries just don’t die from. The question is why, and the answer, I think, is that the health services in those countries are so badly organized because the state just does not have the capacity or perhaps even the interest in delivering that sort of health care.

Do Incentive Prizes Help to Create Solutions?

Douglas Goldstein: It seems that the way that a lot of people are trying to solve it, like the Bill Gates Foundation, is by throwing huge amounts of money at it. To some extent, I think the Gates Foundation has been very successful. On the other hand, we actually recently had Peter Diamandis on The Goldstein on Gelt Show, who set up the XPRIZE. He’s a very big fan of incentive prizes because they bring a lot more people. A $10 million prize can bring a lot more investment in a question because lots of teams will be after it. Yet we don’t really see that happening so much in health care. Is there a reason that you think incentive prizes might not work to solve some of the problems that you are describing?

Angus Deaton: There are strengths and weaknesses with incentive prizes, too. You’d better specify the right thing. A lot of the greatest discoveries of mankind have been people finding things they weren’t looking for. Think of penicillin, for example. You can’t do an incentive prize for something like that, but I think incentive prizes certainly have their strengths, and some of them don’t work. But I think this certainly does have a place. It’s not always easy to get a government to read them and to credibly pay up when someone actually makes a discovery. There’s the famous story of longitude, and the guy who invented the clock that solved the longitude problem, but he never got his prize, disputing about it forever afterward.

It’s actually often very hard to know whether people have met the technical conditions for the prize or not, but I’m very much in favor of that as part of the mix. I think there’s a lot of really good research, and I think we can do it. But coming back to Gates and throwing large sums of money into African Countries, there’s a first train of thought, which is if you put people on antiretroviral therapy, for instance, and they’re alive and would otherwise be dead, that is a huge moral gain. But on the other hand, in the long run you’re not going to solve these problems of kids dying from these diseases if governments and people don’t take their own responsibility for building a health care system, and I don’t think you can do that from the outside.

Douglas Goldstein: I think exactly what you’re describing is a real political problem, and by having people 10,000 and 15,000 miles away tell you how to solve the problem, it is just not going to happen. We see it not only with disease, but also when countries go into other countries and try and say, “We’re going to give you democracy, and this is the way to do it, and we’re going to kill you until you accept it,” it doesn’t always work.

Angus Deaton: It almost never works. You know, the feedbacks are wrong, apart from anything else. The citizens of Sweden or Britain might be very well-meaning, but they’ve got no way of monitoring what’s happening to their money and whether it’s doing good or harm. It’s certainly making them feel good, but sometimes I’m afraid that that’s all that really seems to matter.

Douglas Goldstein: I think my feeling on this has often been, when I talk to people about charity, not that I actually have anything against big charities, but I often tell people to focus locally, and focus on charities that they can personally be involved in so they see where their money goes. Whether you are going to give $1,000 or $100 million, you see what it’s doing and make sure that it actually happens, because otherwise big charities are like big politics. It all ends up getting lost in the mix and not necessarily helping the poor person at the end who you really want to help.

Angus Deaton: If you are doing it locally, there’s feedback so you can see whether what you are doing is some good, and if it goes wrong you could stop, whereas if it goes horribly wrong in the Central African Republic, you have no way of never knowing it. You can’t see what’s happening, and besides, you probably don’t understand how the world works there anyway, so your chances of doing good are more hit or miss.

Douglas Goldstein: What are you working on these days?

Angus Deaton: I’ve been working with Anne Case on a paper that got a huge amount of attention the other day on how white middle-aged people in the United States are dying and the mortality rate has actually gone up after the best part of the century. Mortality decline actually gone up over the last 10 or 12 years, and a lot of that is coming from drug addiction, alcohol abuse, and suicides. It’s much more heavily focused in working class people, so there’s the sense in which working class, white society in America has disintegrated to the point of death. So that’s the big issue that we are working on right now.

Douglas Goldstein: How can people follow you, follow your work, and get a copy of your book?